Force Placed Insurance for Commercial Real Estate

What’s the process of getting lender-placed coverage for commercial properties?

Lenders must adhere to strict requirements when getting lender-placed insurance for a financed commercial property.

First, lenders should confirm that the terms of the property loan allow the lender to pursue lender-placed coverage. The vast majority of commercial property loans normally do, but this should still be confirmed beforehand so that the lender isn’t accidentally exposed to potential action by the borrower.

Second, lenders normally have to adhere to certain federal requirements. The normal process is to give the property owner a 45-day notice, during which time they may obtain adequate insurance. There is then a 15-day reminder that usually must also be issued.

Should the property owner fail to secure adequate insurance by the time the waiting period is over, the lender is typically free to get force-placed coverage for the property.

Because there are specific legal requirements to follow, lenders should consult an insurance agent who specializes in lender-placed policies before actually purchasing one. Lenders might also want to have an attorney, either in-house or outside counsel, review the situation.

What protections does lender-placed insurance offer?

Lender-placed insurance typically covers certain risks that are fundamental to protecting the lender’s interest in a financed commercial property. Exactly what risks are covered depends on the specific policy, but often include perils like: 

• Fire
• Vandalism
• Wind damage
• Lightning

An insurance agent who understands commercial lender-placed policies well can review what specific perils a given policy would cover.

Does lender-placed coverage protect against earthquakes?

In California and certain other states, earthquakes are a major concern. Earthquakes usually aren’t one of the standard perils that lender-placed policies typically cover, however. 

If earthquake coverage is needed for a commercial property in California or elsewhere, an insurance agent who’s well-versed with lender-placed coverages likely can help find a policy that has this protection.

Who pays the premiums for a commercial property’s lender-placed coverage?

The cost of the lender-placed coverage is typically passed onto the property owner, with lenders often adding the premiums onto the property owner’s monthly loan payment. Premiums can usually continue to be passed on until a property owner obtains the coverage they’re required to have.

When a property owner obtains the requisite coverage, lenders often have to cancel the lender-placed policy within 30 days. Any excess premiums normally must be remitted to the property owner within this time frame, as well.

How are claims force-placed coverage claims filed?

Since the coverage afforded by a force-placed policy primarily protects the lender, the lender usually files any claim. The claim is filed with the insurance company, following that insurer’s standard process.

Filing a claim against a force-placed policy is something that an experienced insurance agent can assist with.